Treasury Going Global: Best Practices to Support International Expansion

When the challenges that accompany international expansion are not properly addressed, the financial repercussions can be extensive. From simpler issues such as unnecessary cash movements through tax-heavy regions to the difficulty of ensuring compliance with local financial controls and responsibilities, each issue left unattended can take its toll. These need to be taken into account before such unfavourable treasury structures are expanded and replicated, to the point where they may take several years to rectify.

In an effort to assist corporate treasurers facing the task of international expansion, this article seeks to define a best practice approach and the specific considerations to take into account from an operational point of view. These considerations can be split into five inter-relating focus areas, centering on the long-term view, as illustrated below in Figure 1.

Figure 1: Focus areas for treasury during international expansion

A Seat at the Table

When corporates extend their operations globally, it’s often the case that treasury becomes involved only at the last minute for activities such as opening foreign accounts and establishing banking relations. This is a very reactive manner of operating and, if repeated over the years, it quickly produces a highly de-centralised situation in which even the basic treasury functions can be incredibly arduous to maintain effectively. It’s therefore important that treasury considerations should be taken into account as an inherent part of international operations planning, rather than post-event.

Ideally, the group treasurer should work closely with the chief financial officer (CFO) and senior management to understand the company’s international growth plans and ensure treasury considerations are properly addressed. Being involved at the planning stage is crucial for clarifying the necessary details so that an effective global treasury management system can be developed.

International Strategy

For treasury to clearly formulate its needs and objectives in the planning phase, it needs to establish a central international treasury policy with management buy-in. This policy is of key significance when determining the main objectives and regional policies and its basis should be derived from the objectives of the corporation’s treasury management systems in its home country.

The main issues to cover include:

Centralisation level:

The extent of your company’s treasury centralisation is a highly important aspect of the overall strategy. There are several levels of centralisation, as shown below in Figure 2. While general consensus may be that a full centralisation model is the best way to go, it is important to consider that this approach has certain trade-offs when it comes to local banking and regulations.

Furthermore, it would require local subsidiaries to give up their responsibility for activities such as hedging, which may have benefitted their local profit and loss (P&L) statements in the past. More likely, the ideal model consolidates the treasury function under a global treasurer, and works from an operating model and infrastructure that connects a corporation’s diverse activities. This will assure that local treasury groups are capable of quickly and rigorously responding to activities in a volatile market while simultaneously maintaining proper reporting capabilities.

Figure 2: Levels of centralisation in treasury

Governance:

During any type of global expansion – especially in developing regions where governance structures may not be sufficiently present – fortifying governance and controls within a treasury department is highly important. Given the many financial instruments and accounts that the department has access to, countering fraud and mismanagement has to be a consideration. This will require a thorough examination of current policies and processes for its core responsibilities, followed by comprehensive testing to verify that they apply properly to realistic situations.

Banking Relations:

Different regions may have various alternative requirements for establishing bank relationships, making the opening of bank accounts and the structuring of them a challenging task. Furthermore, the strategic outset of the company in terms of bank relationships should be closely adhered to when managing these relations. The best course of action in such cases is often to work with someone who has experience in these regions, and attribute a specific professional to manage the entire process.

FX policy:

When working with various currency markets within an organisation, there may be distinct exposures and risk levels that need to be offset for each region. While it is easy to get lost in the specific necessities for each market, it is important to consider one global FX policy for the whole company, which may then be altered for region-specific needs. This approach will keep priorities aligned with the company’s central view, yet will also leave flexibility to help control region-specific situations.

Such cases include dealing with sweeping of excess cash, cross-border payment flows, handling inter-company payments and repatriation of profits. Developing a global policy may prove difficult, and considering a risk management framework as the basis of the treasury department’s policy may help in providing clarity in the decision-making process. An example of such a framework can be found in figure 3.

Figure 3: Corporate risk management framework

Liquidity Management:

In order for an organisation to properly manage liquidity internationally, corporate treasury must have control over the concentration accounts. This then leads to the bigger question of how much autonomy the offshore units should have when handling short-term borrowing and investment decisions. If an organisation wishes to manage liquidity from a single point, it needs to propagate a clear understanding throughout all business units that cash is to be regarded as a corporate asset, overseen by corporate treasury.

One method of establishing this is by having the signing authority for international concentration accounts entrusted to corporate treasury personnel only. Furthermore, it is essential for the purpose of liquidity management to have clear and reliable access to (cash) forecasting from offshore offices.

Without forecasting reliability, managing corporate liquidity properly becomes a herculean task. Proper controls help, as well as technological considerations which will be discussed in more detail below.

Local Policies Specific to Situation and Regulation

Once international policies and best practices have been established, it is important to make adjustments for the specific regions the organisation is expanding into. Local regulations and/or financial situations sometimes make for highly specific needs, including the following:

Payments/Receipts Services:

Payment terms may be highly varied in different countries. For instance, the standard in many western markets is 30 days, yet this period can be as much as 360 days in some South American and African regions. If this waiting period is not properly accounted for in terms of accounts receivables and payables (AR/AP), then managing working capital can become incredibly challenging.

While many companies do take note, their focus is often concentrated on accounting measures such as P&L statements, and they fail to develop a proper discipline in working capital management. Doing so is certainly difficult and requires spending much time with local business units, as well as a good understanding of how they pay suppliers and consumer behaviour. However, optimising working capital management will ultimately allow the treasurer to take on a key strategic financial advisory position within the organisation, opening up future opportunities.

Short-term Investments and Borrowings:

In order for investing and borrowing in local currencies to be a useful constituent for managing FX exposures, the organisation needs to set very clear guidelines on the amount of control foreign units have over short-term investments and borrowings. Dependent on the nature of the operations, an interest-bearing current account might provide the best form of investment for subsidiaries. In other countries, where credit interest rates are lower, alternatives such as treasury bills, interest-bearing deposit accounts or time deposits may be preferred.

Use of Trade Products for Risk Management Purposes:

When dealing with foreign trading partners, extra risk may be involved. In these cases, one option is to use letters of credit (LCs) or documentary collections rather than open accounts. Doing so enables treasury to set conditions so that outgoing payments aren’t executed until proper shipping documentation has been received.

Technology

For companies expanding internationally, technological considerations become all the more important as the need for reliable reporting, sending and receiving messages and risk management grow exponentially. While it is often difficult to quantify the cash benefits of an enterprise resource planning (ERP) or treasury management system (TMS), the inadequacy of using spreadsheet reporting often becomes apparent as expansion progresses.

As powerful as spreadsheet reporting might be, it is often highly lacking in terms of control, validation and interconnectivity of information; all of which are essential for international business. The benefits of having a unified database, automated processes, integration, risk avoidance and enhanced management reporting make a strong case for considering technological upgrades.

Develop a Long-term View

In order for a treasury department to support the organisation in its quest for continuous future growth, it needs to adopt a corresponding view. This means it cannot treat the launch of an international subsidiary as a singular event. Rather, taking a long-term view considering future expansion and consistent growth are key elements to creating a sustainable perspective involving policies and structures which are scalable as the company continues to grow.

The main aspect to keep in mind is that a long-term view is constantly subject to the company’s situation, and will need to be re-visited and evolve over time as the organisation grows and changes.

Ultimately, there are many aspects to international expansion, many of which are highly dependent on the individual situation. These key subjects may offer a guideline on where to start and how to approach this type of situation. If many doubts persist, enlisting an experienced party to assist on the complexity of such projects could always provide a solution.